Medvedev Shakes Up the Kremlin

Igor Sechin, 51, is Russia's Deputy Prime Minister. He's also chairman of state-controlled Rosneft, Russia's largest oil company. Unofficially, Sechin is one of the siloviki, the "men of power" who often have security backgrounds and rose to prominence during Vladimir Putin's presidency. Although Putin is now technically No. 2—he's Prime Minister to President Dmitry Medvedev—he and his allies still have plenty of clout.

On Apr. 2, Medvedev upset this arrangement. He announced that eight top ministers would step down from the boards of companies that they also regulate as Cabinet members. The officials affected include, among others, Deputy Prime Ministers Sechin and Alexei Kudrin and First Deputy Prime Minister Viktor Zubkov. They must be off these boards by July 1 and replaced by independent directors. Sechin and the others will stay in the government. In addition, by Oct. 1 steps must be taken to remove all other top state employees from the boards of public companies.

On Apr. 5 the Russian daily Kommersant published a list of candidates for the state company boards, citing unidentified government officials. They include the head of Morgan Stanley's (MS) Russian subsidiary, who may replace Sechin at Rosneft, and Ernst & Young's country managing partner, who could take over from the energy minister on pipeline operator Transneft's board, according to the newspaper. Morgan and E&Y could not return calls seeking comment in time.

Medvedev's move shocked and delighted local corporate governance advocates. "It's very significant, it's a small revolution," says activist shareholder Alexey Navalny. "His idea is really supported by business, by civil society." Russian billionaire Alexander Lebedev, owner of the U.K.'s Evening Standard and Independent newspapers, says he fully supports Medvedev's initiative. Asked if Putin is likely to have given full backing to Medvedev's order, Lebedev replied: "As Prime Minister, he has to carry it out, it doesn't matter what he thinks." Putin hasn't commented on the directive.

Medvedev, 45, a lawyer from St. Petersburg, replaced Putin as President in 2008 because the constitutional limit on more than two consecutive presidential terms required Putin to leave office. Putin, 58, an ex-KGB officer, has nonetheless kept most of the power. The Apr. 2 directive could affect this structure. "This risks triggering a war between the elites," says Alexei Mukhin, director of the Moscow-based Center for Political Information, a research group. "It will mean a real conflict with Putin." Russia holds presidential elections next March; it still isn't clear who will run.

Medvedev has tried to widen Russia's investment appeal beyond energy to speed up economic growth. Many western investors are wary of Russian stocks, fearing that Russia does not provide shareholders enough legal protection. Rosneft, for example, trades at a price-earnings ratio of 8.8; ExxonMobil (XOM) trades at a p-e of 13.6. Rosneft acquired many of its oil assets from Yukos, the private Russian oil company that the Kremlin dismantled after its main owner, Mikhail Khodorkovsky, was found guilty of tax evasion and sent to a Siberian prison.

Now it's time to see how Medvedev follows through. "There is a skeptical view that this is window dressing because they know they have control of the companies whether they are formally in charge or not," says Charles Robertson, investment bank Renaissance Capital's chief global economist in London. "But there is an alternative view that the authorities recognize that Russia is at risk of stagnating over a number of years without change."

The bottom line: Russian President Medvedev may be starting a new push for shareholder rights by removing state officials from top corporate boards.

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